In the fast-paced world of cryptocurrency, launching a successful ERC-20 token requires more than just a compelling concept. One feature that can significantly increase the appeal and longevity of your token is the implementation of a liquidity tax. This innovative mechanism has become a game changer for many token projects, providing a way to maintain a healthy trading ecosystem and ensure long-term stability.
The liquidity tax works by automatically redirecting a portion of each transaction back into the token's liquidity pool. This continuous reinvestment helps ensure that your token remains tradable and attractive to potential investors, even as market conditions fluctuate. For experienced blockchain developers and crypto enthusiasts alike, understanding and implementing the liquidity tax can give your project a significant competitive advantage.
In this guide, we'll walk you through the process of creating an ERC-20 token with liquidity tax. We'll explore why this feature is critical to a sustainable token economy, how it works, and the steps you need to take to incorporate it into your token design. If you're looking to launch a new project, mastering the concept of liquidity tax is a valuable skill in today's dynamic crypto landscape.
Why the Liquidity Tax Matters
In the world of ERC-20 tokens, liquidity is king. A token with plenty of liquidity is more attractive to traders and investors, as it allows for easier buying and selling without significant price fluctuations. This is where the liquidity tax comes in, serving as a powerful way to maintain and grow your token's liquidity over time.
Sustainable Liquidity Growth
The liquidity tax automatically adds a small percentage of each transaction to the token's liquidity pool. This continuous injection of liquidity ensures that your token remains tradable even as it grows in popularity. Unlike manual liquidity additions, which can be sporadic and dependent on team resources, the liquidity tax provides a consistent, automated way to support your token's trading pair.
Reduced Volatility
By constantly adding to the liquidity pool, the liquidity tax helps stabilize the price of your token. Larger pools of liquidity can more effectively absorb buying and selling pressure, resulting in smoother price movements and reducing the impact of large trades. This stability can make your token more attractive to long-term holders and serious investors.
Community Trust
Implementing a liquidity tax demonstrates a commitment to the long-term health of your token. It shows that you're not just focused on short-term profits, but are actively working to create a sustainable ecosystem. This can help build trust within your community and attract more holders to your project.
Deterrent to Pump-and-dump Schemes
The liquidity tax can act as a deterrent to bad actors looking to manipulate the price of your token. Since a portion of each sale goes back into the liquidity pool, it becomes more difficult and less profitable to execute pump-and-dump schemes, protecting genuine investors and maintaining the integrity of your token's economy.
Automatic Liquidity Generation
Perhaps one of the most significant benefits of the liquidity tax is its ability to automatically generate liquidity tokens. These tokens, which represent a share of the liquidity pool, are often burned or locked, creating an ever-growing, unruggable liquidity base for your token. This portion of liquidity provides a solid foundation for the long-term trading viability of your token.
Adaptable to Project Needs
The beauty of the liquidity tax is its flexibility. You can customize the tax rates for different types of transactions - buys, sells and transfers - allowing you to fine-tune the mechanism to best suit your project's specific needs and goals.
As we move forward in this guide, we'll explore how to effectively implement this powerful feature in your token design to ensure you can leverage all of these benefits for your project.
Creating Your ERC-20 Token with Liquidity Tax
Now that we understand the importance of liquidity tax, let's dive into the practical steps of creating your ERC-20 token with this feature. While implementing a liquidity tax mechanism traditionally requires extensive coding knowledge and blockchain expertise, 20lab's ERC-20 token generator simplifies this process significantly.
With 20lab, you can create a professional-grade token with liquidity tax in just a few simple steps, no coding required. Moreover, creating such a token will take as little time as reading this post!
Step 1: Initiating Your ERC-20 Token Creation
First, visit 20lab.app and navigate to the generator page. Click on "Create ERC-20 Token" to start the process.
The next important step is to connect your Web3 wallet to the platform. 20lab supports a wide range of wallets including MetaMask, Coinbase Wallet and Trust Wallet. Once connected, your wallet address will appear in the top right corner of the page, confirming successful integration.
Before proceeding, make sure you're on the appropriate blockchain network:
- For production tokens, select the desired Mainnet,
- For testing purposes, choose a suitable Testnet.
20lab offers a range of popular blockchains, allowing you to select one that aligns with your project requirements. Consider factors such as:
- Transaction costs,
- Network speed,
- Ecosystem compatibility,
- Target audience preferences.
Your choice of blockchain will significantly impact your token's functionality and adoption, so carefully evaluate your options based on your project's specific needs and long-term objectives.
Step 2: Establishing Your ERC-20 Token's Core Parameters
This phase is critical because it defines the essential attributes of your ERC-20 token. Start by creating a distinctive and meaningful name for your token, accompanied by a short, memorable ticker symbol. It's a good idea to do some research to ensure that your chosen identifiers are unique in the crypto space.
Next, specify the total supply of tokens. For example, setting a supply of 100,000,000 tokens can provide sufficient liquidity while maintaining a sense of scarcity.
Determine the divisibility of the token by setting the number of decimal places. The industry standard for ERC-20 tokens is 18 decimal places, mirroring the divisibility of Ethereum and other major cryptocurrencies. This level of precision facilitates microtransactions and fine-tuned token economics.
You have the option to specify a unique contract name that will be the identifier for your smart contract on Block Explorer after verification. This can be the same as your token name or a more technical name such as "DeflationaryTokenV1".
Critical decisions include selecting the wallet to receive the initial token supply and determining the token owner. The supply recipient will hold the entire token allocation at launch, which can be your personal wallet or a dedicated project wallet. The token owner will have administrative rights to owner-restricted functionality. While this is often the same as the deployer, it can be a separate address if desired. For added security, consider implementing a multi-signature wallet.
These basic settings shape the identity and operational framework of your token. Make informed choices, taking into account your project's long-term goals and scalability potential. Decisions made at this stage will affect your token's perception, utility, and integration capabilities with decentralized applications, ultimately impacting the user experience.
Step 3: Implementing the Liquidity Tax
After setting up the general token information, it's time to implement the liquidity tax. Liquidity tax is a powerful mechanism that allows you to automatically add transaction fees to the main liquidity pool on your default exchange, thereby increasing the stability and tradability of your token.
To set up the liquidity tax, navigate to the "Taxes" page of the creation form on the 20lab platform and find the "Liquidity tax" section. If it's not immediately visible, you'll first need to enable the "Default Exchange" option and select a DEX for your token. This is mandatory because the liquidity tax will be linked to your main liquidity pool in order to constantly provide liquidity there. Your token needs to know where the target liquidity pool is located.
The liquidity tax works similarly to a wallet tax, but with one key difference: the recipient is always the liquidity pool in your default exchange, which is automatically created during token deployment. The liquidity pair is always structured as (your token)/(native coin). For example, if you deploy on BNB Smart Chain, the pair would be (your token)/BNB.
One of the most important aspects of this feature is that the LP tokens minted by the DEX as a result of adding liquidity are permanently burned. This process makes this part of the liquidity unremovable, providing long-term stability to your token's trading pair.
It's important to note that the liquidity tax requires a swap threshold in order to function properly. This threshold determines when the collected taxes are swapped to the native coin (e.g. BNB) before being added to the liquidity pool along with your token. The swap threshold helps to optimize gas costs and ensure efficient liquidity additions. If you are not sure what to choose, we recommend that you keep the default threshold at 0.5% of your main pool liquidity.
Step 4: Review and Deploy
Before finalizing your token creation, it's important to carefully review all configured parameters on the "Summary" page. This final review stage acts as an important check, allowing you to catch and correct any potential errors or oversights that could become costly after deployment.
Once you have thoroughly reviewed all the details, click the button to initiate the validation process. This automated check serves as an additional layer of protection, identifying any technical inconsistencies or issues that could compromise the functionality of your token on the blockchain.
Upon successful validation, you may be presented with a deployment modal that allows you to personalize your token's address pattern. This unique feature allows you to add a distinctive touch to your token's blockchain identifier, enhancing its memorability and brand alignment.
Now you're ready for the big moment. Click "Deploy" to begin the process of instantiating your token on your chosen blockchain network. This action will trigger a prompt from your connected wallet requesting transaction confirmation. Upon confirmation, your ERC-20 token will be live on the selected blockchain.
Managing Your ERC-20 Token with Liquidity Tax
After successfully launching your ERC-20 token with liquidity tax using 20lab.app, you will gain access to an intuitive management dashboard. This comprehensive control panel provides a suite of tools to monitor and fine-tune your newly created token.
The dashboard provides a detailed view of key information about your token. At a glance, you can access critical details such as your token's blockchain address, total supply, token name, ticker symbol and decimal precision. This ensures that you're always aware of your token's fundamental metrics.
A critical component of the dashboard is the ownership management suite. As the token creator, you retain initial ownership unless delegated during the creation process. The "Ownable" section allows you to view current permissions, transfer ownership to a new address, or renounce ownership as needed.
Since the liquidity tax is built into your token's smart contract, 2 new sections of the dashboard allow you to monitor and manage this feature. The "Liquidity Tax" section displays the current tax rates for different transaction types (buy, sell and transfer), however "Taxes" allows you to manage the current swap threshold and whitelist from paying fees.
You can check the addresses whitelisted by default in our documentation or directly in your token's dashboard.
Importantly, you can adjust the liquidity tax rates even after deployment, as long as token ownership is not renounced. This flexibility allows you to adapt to changing market conditions or project needs. To change the rates, simply enter new percentages for each transaction type (buy, sell, and transfer) in the appropriate update fields and confirm the transaction from the token owner's wallet. If you don't want to charge taxes on a particular transaction type, simply enter 0%.
Additionally, if you've enabled the default exchange option, you can manage AMM pair contracts in the DEX section of the dashboard. This feature allows you to add or remove recognized exchange pairs, ensuring that your liquidity tax works seamlessly across different decentralized exchanges if your token has liquidity on more than one exchange pair.
Remember, while the ability to change liquidity tax rates provides flexibility, it's important to communicate any changes transparently to your token holders. This will help maintain trust and stability in your token's ecosystem. The dashboard gives you the tools to monitor, optimize and adjust this feature to ensure the long-term health of your token's liquidity.
Testing Liquidity Tax in Action
To understand how the liquidity tax works, let's explore a real-world scenario where tokens are transferred or traded, triggering the tax mechanism.
Adding Liquidity on a Decentralized Exchange (DEX)
When you first create your ERC-20 token, one of the first steps is to add liquidity to a decentralized exchange (DEX). This involves pairing your token with a stablecoin or other cryptocurrency to facilitate trading and adding both to a liquidity pool. This pool allows users to buy and sell your token.
Buying using Different Address
When a user buys your token on the default exchange, the buy tax is applied. For example, if you have a 3% buy tax and someone buys 1000 tokens, they will receive 970 tokens, with 30 tokens taken as tax. Similarly, if you have a 5% sell tax and a user sells 1000 tokens, they will receive the equivalent of 950 tokens in native coin, with 50 tokens collected as tax.
For transfers between wallets that are not buy or sell transactions on the default exchange, the transfer tax rate is applied. If this is set at 2%, and a user transfers 1000 tokens to another wallet, the recipient will receive 980 tokens, with 20 tokens collected as tax.
Let's try to buy 1000 tokens using a different address to see how the fee is calculated.
After confirming the transaction in the wallet, let's go to the Block Explorer page to see more details about the purchase transaction.
As we can see on Block Explorer in the "ERC-20 Tokens Transferred" row, 20 DET were sent to the token contract and we received 980 DET, that's exactly the liquidity fee taking the 2% specified when generating the token.
Auto-Adding Liquidity
The taxes collected from these transactions accumulate on your token contract until they reach the swap threshold. Once this threshold is reached, the smart contract automatically converts half of the collected tokens to the native coin (e.g. BNB), adds both the tokens and the native coin to the liquidity pool, and burns LP tokens to make the added liquidity unremovable.
After buying from another address, let's go back to the dashboard and see the accumulation progress.
The 20 DET tokens from the purchase transaction are now sitting and waiting for the swap threshold to be reached. Let's make another larger purchase to see what happens after the progress bar is full.
The amount of fees collected is now higher and ready to be swapped and added to the liquidity pool. We were able to overfill the swap threshold because it cannot be triggered on buys. As soon as someone sells, transfers or buys tokens on another liquidity pool, the liquidity is added.
Now, let's sell a small portion of tokens to activate the liquidity addition.
After the transaction is confirmed, the swap threshold will be cleared.
Looking at the LP token transfers on Block Explorer, we can see that in the sell transaction, ~0.35 LP tokens were minted and immediately sent back to the 0x0000...0000 address. This means that liquidity was successfully added and made unremovable.
Conclusion
Creating an ERC-20 token with a liquidity tax is a powerful strategy to ensure the long-term sustainability and stability of your cryptocurrency project. By implementing this feature through 20lab's user-friendly token generator, you're setting your token up for success from the very beginning. The liquidity tax mechanism automatically contributes to your token's liquidity pool, reducing price volatility and improving tradability. It creates a self-sustaining ecosystem where every transaction strengthens your token's market presence, demonstrating a commitment to your project's long-term viability.
20lab's intuitive interface makes it easy to set up, deploy and manage your liquidity tax token, even if you don't have advanced programming skills. The platform's comprehensive dashboard allows you to monitor your token's performance, adjust tax rates and swap thresholds as needed, and maintain full control over your project's development. Whether you're an experienced developer or a blockchain enthusiast taking your first steps into token creation, 20lab gives you the tools you need to bring your vision to life.
If you have any questions about creating or managing your ERC-20 token, don't hesitate to reach out to us on our Telegram group.
